Ministers are under pressure to impose restrictions on free bus passes for pensioners after a leading transport operator warned that giving old people a "blank cheque" for travel is financially unsustainable.

The free bus pass, a key benefit for 11 million over-60s, costs £1bn a year, but is the cause of mounting tension between local authorities and bus operators. Both sides say it is inadequately funded and the financial strain has increased since it was extended to allow pensioners to travel anywhere in the UK - prompting two friends to travel more than 500 miles by bus from Berwick-upon-Tweed to Land's End last year.

Keith Ludeman, chief executive of Go-Ahead Group, whose services operate in London, Oxford, Brighton and the north-east, told the Observer: "The government has stated that the pass must become a smart card [similar to London's Oyster card]. Like any card, it can be limited with a certain amount of value and that seems a reasonable move. Pensioners cannot be given a blank cheque."Help the Aged rejected the call for restrictions, claiming that the pass is vital for tackling one of the least publicised problems among the elderly - isolation. "One in eight old people would describe themselves as isolated and lonely and transport is key to assuaging that. Limiting the card could undermine the progress that we have made," said David Sinclair, the charity's head of policy.

Ludeman warned that routes popular with the elderly would have to be cut if changes were not made. "It ends up with the perverse result that you reduce mileage on some routes."

Bus operators in tourist areas such as north Norfolk and the south coast have had to put on extra services in order to cope with the increased demand from adventurous pensioners. The government has already barred pass-holders from hundreds of services by banning their use on coaches and open-top bus tours. Stagecoach, Britain's biggest bus operator, has cut services in Worthing - where a quarter of the population is over 60 - after surging demand left it with a £2m funding gap.

Local authorities are also concerned about the financial demands of ferrying millions of pensioners around the UK. The Local Government Association warned last year that 30 councils planned to cut services or raise taxes in order to fund the scheme.

The £1bn bus pass fund is operated by local authorities who compensate bus operators for every elderly passenger, with some bus companies receiving less than half the fare. This has prompted complaints that bus operators' profits are being whittled away as full-paying passengers are squeezed off services. Privately, bus companies are highly critical of the scheme, and one proposal circulating in the industry would see pensioners charged a fee of around 10p for every £1 trip.

"Everyone knows that the concessionary fares scheme as it currently operates is unsustainable," said one bus industry source. "Local authorities have issues over whether they have adequate funding from government and bus operators are not properly reimbursed."

A spokesman for the Department for Transport said there were no plans to limit the scheme. "The government is proud of its concessionary travel policy. A recent survey suggests around 95% of people support the England-wide concession and we have no plans to limit it."